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Exam 12: Capital Budgeting Decisions

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Question 1

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(Ignore income taxes in this problem. ) The management of Dittrick Corporation is considering the following three investment projects: Rank the projects according to the profitability index,from most profitable to least profitable.

A) I,J,K
B) K,J,I
C) J,K,I
D) I,K,J

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Question 2

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(Ignore income taxes in this problem. )Hayner Limos,Inc. ,is considering the purchase of a limousine that would cost $149,868,would have a useful life of 9 years,and would have no salvage value.The limousine would bring in cash inflows of $36,000 per year in excess of its cash operating costs. Required: Determine the internal rate of return on the investment in the new limousine.Show your work!

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Question 3

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If the internal rate of return exceeds the required rate of return for a project,then the net present value of that project is positive.

(Ignore income taxes in this problem. ) Girman Corporation is considering three investment projects: K,L,and M.Project K would require an investment of $27,000,Project L of $59,000,and Project M of $88,000.No other cash outflows would be involved.The present value of the cash inflows would be $31,860 for Project K,$66,080 for Project L,and $95,040 for Project M.Rank the projects according to the profitability index,from most profitable to least profitable.

(Ignore income taxes in this problem. )Whatley Inc.is considering investing in a project that would require an initial investment of $460,000.The life of the project would be 5 years.The annual net cash inflows from the project would be $138,000.The salvage value of the assets at the end of the project would be $69,000.The company uses a discount rate of 15%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.) The management of Pattee Corporation is considering three investment projects-M, N, and O. Project M would require an investment of $25,000, Project N of $67,000, and Project O of $70,000. The present value of the cash inflows would be $28,750 for Project M, $73,700 for Project N, and $79,100 for Project O. -Rank the projects according to the profitability index,from most profitable to least profitable.

(Ignore income taxes in this problem. ) Stutz Company purchased a machine with an estimated useful life of seven years.The machine will generate cash inflows of $8,000 each year over the next seven years.If the machine has no salvage value at the end of seven years,if Stutz's discount rate is 12%,and if the net present value of this investment is $15,000,then the purchase price of the machine was:

An investment project for which the net present value is $300 would result in which of the following conclusions?

(Ignore income taxes in this problem. ) The Baker Company purchased a piece of equipment with the following expected results: The initial cost of the equipment was:

(Ignore income taxes in this problem. ) Sibble Corporation is considering the purchase of a machine that would cost $330,000 and would last for 5 years.At the end of 5 years,the machine would have a salvage value of $50,000.By reducing labor and other operating costs,the machine would provide annual cost savings of $76,000.The company requires a minimum pretax return of 12% on all investment projects.The net present value of the proposed project is closest to:

(Ignore income taxes in this problem. )The management of Orebaugh Corporation is investigating automating a process by replacing old equipment by a new machine.The old equipment would be sold for scrap now for $15,000.The new machine would cost $445,000,would have a 5 year useful life,and would have no salvage value.By automating the process,the company would save $165,000 per year in cash operating costs. Required: Determine the simple rate of return on the investment to the nearest tenth of a percent.Show your work!

(Ignore income taxes in this problem.) Altro Corporation is considering the following three investment projects: -Rank the projects according to the profitability index,from most profitable to least profitable.

(Ignore income taxes in this problem.) Burchell Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is -$594,381. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft. -Ignoring the annual benefit,to the nearest whole dollar how large would the salvage value of the aircraft have to be to make the investment in the aircraft financially attractive?

(Ignore income taxes in this problem.) Bugle's Bagel Bakery is investigating the purchase of a new bagel making machine. This machine would provide an annual operating cost savings of $3,650 for each of the next 4 years. In addition, this new machine would allow the production of one new type of bagel which would result in selling 1,500 dozen more bagels each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450 and it will have a 4 year useful life. Bugle's discount rate is 14%. -The internal rate of return for this investment is closest to:

If an investment has a project profitability index of 0.15,then the:

(Ignore income taxes in this problem.) Rushforth Manufacturing has $90,000 to invest in either Project A or Project B. The following data are available on these projects: Both projects will have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Rushforth's required rate of return is 14%. -The net present value of Project A is:

(Ignore income taxes in this problem.) Burchell Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the initial investment and the annual operating cash cost is -$594,381. Management is having difficulty estimating the annual benefit of having the aircraft and estimating the salvage value of the aircraft. -Ignoring any salvage value,to the nearest whole dollar how large would the annual benefit have to be to make the investment in the aircraft financially attractive?

(Ignore income taxes in this problem. )Ahlman Corporation is considering the following three investment projects: Required: Rank the investment projects using the project profitability index.Show your work

(Ignore income taxes in this problem.) The Finney Company is reviewing the possibility of remodeling one of its showrooms and buying some new equipment to improve sales operations. The remodeling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The immediate cash outflow required for this project would be:

(Ignore income taxes in this problem. ) Mongon Roofing is considering the purchase of a crane that would cost $40,224,would have a useful life of 5 years,and would have no salvage value.The use of the crane would result in labor savings of $12,000 per year.The internal rate of return on the investment in the crane is closest to: